Red Ink in Newark Mars State Takeover

More than four years into state control of its operations, the
troubled Newark school system has developed a $58 million hole in its
budget that New Jersey officials are being forced to fill in order to
stave off program or salary cuts in the state's largest district.

The shortfall comes at a time when enthusiasm for state takeovers is
ebbing nationwide, and it has already added new questions about the
wisdom of running a city's schools from the state capital.

While no one would claim that New Jersey has completely turned
around the three districts in which it has seized control—Newark,
Jersey City, and Paterson—state officials have often cited vastly
improved budget and management practices as a major accomplishment.
Now, even that success seems compromised.

State Commissioner of Education David C. Hespe disclosed the sizable
deficit this month, pointing to an inefficient business office under
Newark's former state-appointed superintendent, Beverly L. Hall. Ms.
Hall left the 44,000-student system in June to head Atlanta's
schools.

"In hindsight, we certainly cannot say that the business office was
being run efficiently [and] that was happening in the district under
state operation,'' Robert A. DeSando, a spokesman for Mr. Hespe, said
last week. Mr. Hespe himself did not take office until April, replacing
Leo F. Klagholz.

The $58 million shortfall represents about 12 percent of the
district's nearly $500 million operating budget.

Plugging the Hole

State officials have agreed to help close the gap in the current
budget by releasing $37 million in additional state aid required under
a recent court decision, forgiving some loans, and other measures. The
district has found some $10 million in unspent funds that can be
applied to the deficit.

The alternative, according to Superintendent Marion A. Bolden, Ms.
Hall's replacement, would have been cuts to teachers' salaries and
education programs.

Since the deficit was disclosed, state lawmakers have expressed
shock and demanded explanations.

"I never expected we'd see anything like this [deficit] with a
state-run school district," said Sen. Robert J. Martin, a Republican
who is the chairman of the Senate education committee. The committee
has scheduled hearings this month on the district's finances.

State officials seized control of the Newark schools in 1995, citing
persistent academic failure and deep-seated problems with district
finances and management—much as they had earlier when taking over
the Jersey City and Paterson schools. Last spring, Mr. Hespe announced
a plan to return the Jersey City schools, which the state began
overseeing in 1989, to local control.

Even without the dire consequences of cutting back programs,
straightening out the Newark district's finances has been, at the very
least, an unwelcome and demoralizing distraction, the new
superintendent said.

"We were trying as hard as we could not to disrupt the schools,"
which by state mandate are preparing to overhaul their operations to
raise student achievement, Ms. Bolden said. "But certainly there have
been some inconveniences."

From Surplus to Deficit

According to the state commissioner and others, the financial
problems had been building for three years, with accounts overspent and
accounting cycles left incomplete.

"There should have been a bookkeeping process in place that alerted
officials," said Mr. DeSando, Mr. Hespe's spokesman.

The district went from an $85 million surplus in 1996-97 to this
year's estimated deficit. Because of accounting woes, the 1997-98 audit
was not completed until almost a year after the deadline imposed by
law, and the district operated for five months without an official
budget.

Ms. Bolden said she was aware of budget problems while she was in
her former job as the district's associate superintendent for
curriculum. "I knew as a consumer that folks in the district were very
frustrated by not knowing the balance" in their accounts, she said. To
keep from overspending, she added, "I did my own record-keeping."

The commissioner learned of the problems as he was preparing to take
office early last spring, his spokesman, Mr. DeSando, said.

Starting in March, with extensive help from the national accounting
firm Ernst & Young, the commissioner overhauled the district's
business office. After Ms. Hall's departure for Atlanta, the chief
financial officer stepped down under pressure.

Unrecorded Bills

Neither Ms. Hall nor Leonard Hellenbrand, the former finance chief,
could be reached for comment last week.

But they have said publicly that they did not have the wherewithal
to simultaneously update inadequate systems and run the district day to
day. Ms. Hall, who said she did not believe this year's budget was in
the red when she left, has allowed that her administration might have
waited too long to seek state help.

Mr. Klagholz, the former state commissioner, who initially brought
in Ernst & Young to help the district, did not return calls to his
office.

Among the specific problems discovered by the auditors was $7
million in unrecorded bills. The auditors have found no evidence of
criminal wrongdoing, Mr. DeSando added.

Ms. Bolden said that, hard as it had been, business officials in her
administration—most of whom also served under Ms. Hall—had
improved accounting procedures while maintaining day-to-day functions.
She argued that the state fell down on the job, too.

"I just know that if there had been checks and balances and closer
oversight, it wouldn't have happened,'' she said.

Both the superintendent and the commissioner say the accounting
problems are now under control, and they expect to enter the new budget
year without a deficit.

Still, there are those who say the shortfall is more evidence that
the long arm of the state inevitably does more harm than good.

Joseph Del Grosso, the president of the Newark Teachers Union and a
longtime critic of the takeover, acknowledged that the district's
financial and accounting problems were grave before the state stepped
in. But the head of the American Federation of Teachers affiliate said
Ms. Hall had not turned the pattern around.

Instead, her administration had spent money "cavalierly," he said,
and then failed to keep track of the spending.

Moreover, he argued, the hostile atmosphere of the takeover drained
the district of experienced staff members who could have helped the
state recognize and deal with the looming deficit.

"At the root of the problem is that a takeover is very
adversarial,'' Mr. Del Grosso said.

Jean Anyon, an education professor at the Newark campus of Rutgers
University, said blame for the district's woes lies deeper than
particular district or state education officials.

She said the legislature has reneged on its responsibilities to
urban districts such as Newark, which need a steady infusion of extra
resources to address the disadvantages faced by the children they
educate.

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